The CBOE Volatility Index (VIX) moved up 3.32 to 52.62 following another turbulent day in the equity market. However, with the major averages setting new 10-year lows, and financials reeling, some might wonder why VIX isn’t even higher. It remains significantly below the extremes seen in October and November.
One important reason is that, while stocks are still falling, actual volatility is not as high now as it was then. On November 21, when the S&P 500 hit its multi-year low of 741.02 (it is still above that level at 743.33), the 30-day historical volatility of the S&P 500 was in the low 80s. It is now in the high 30s. Since VIX is not only a measure of sentiment, and also a gauge of market volatility, it is not rallying back to the highs seen during October and November because the market is not seeing the same massive intra-day swings.
Nevertheless, more days like Monday, when the S&P 500 falls 26 points, could easily push VIX higher in the weeks ahead.
One strategist appears to be bracing for that possibility with a substantial butterfly spread on the volatility index. In midday trading Monday, it looks like the strategist sold 3000 March 65 calls for $1.05, bought half (1500) as many 75 calls for 45 cents and bought 1500 Mar 50 calls for $3.91.
This butterfly has a directional bias since the best profits exist if VIX (futures ) close at 65 at the March options expiration (22 days). Also, since the strike prices arenÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢t spaced evenly (65 – 50 = 15: 75 – 65 = 10), the risk is to the downside. In this trade, as long as the index moves above the downside breakeven of 52.26, a profit is made, which makes it a good trade for strategists expecting a rally in the VIX over the next few weeks and or for investors looking for some defense if the S&P 500 makes a volatile move below its November 21 lows.
Category: All Indexes
About the Author (Author Profile)
Frederic Ruffy is a well-known trader, writer, and strategist who has spent years educating investors and creating intelligent, insightful, unbiased market observations that are frequently cited by the Wall Street Journal and other financial publications. As senior analyst, Fred provides frequent and regular notes and daily updates for activity of interest.